In this Section:ANNUITIES

Surrender Charges’ Disappearing Act

Surrender charges on fee-based variable annuities seem to be retreating faster than the polar ice caps, new filings reveal.

The shorter surrender periods and no surrender charges are the result of annuity companies offering fee-based financial advisors new options that coincide with the dawn of the Department of Labor’s fiduciary rule. The rule began taking effect June 9.

Nearly two dozen of these contracts were filed between Dec. 1 and May 30, Morningstar’s filings indicate.

“These advisor-sold contracts typically have no surrender or a very short surrender (period) with very low penalties,” said Kevin Loffredi, senior product manager, annuity solutions, for Morningstar.

Surrender charges penalize an annuity contract holder for canceling the contract before a certain date. They also allow insurance companies to recoup their commissions paid upfront to advisors on the sale of a commission-based contract.

Charges typically are pegged to a sliding scale with higher charges in the earlier years and lower charges in the later years before disappearing altogether.

With commission-based variable annuities, insurers bear a greater portion of the risk than with a fee-based model.

Under a fee-based model, advisors earn a fee even if the investor turns in his or her variable annuity early after a year or two. That represents a much lower risk for insurers.

Lincoln Financial, Voya Financial, AIG, Jackson National, Transamerica, Nationwide, Pacific Life and Great West Life have recently launched variable annuities with no surrender charges, company websites indicate.

Lower surrender charges could provide a boost to new variable annuity sales, which fell 21.4 percent to $101 billion in 2016 compared with 2015, Morningstar reported earlier this year.

Sales of 10-Year Products Soften

In the coming months, advisors can expect insurance companies to release more short-term surrender products, said annuity market expert Sheryl J. Moore. Moore is president and CEO of Moore Market Intelligence and Wink Inc.

Insurers perceive longer surrender charge products as harder to justify under the fiduciary rule’s best interest contract, she said.

First-quarter sales data appear to bear this out.

In the first quarter, 22.1 percent of fixed indexed annuity (FIA) sales were for FIAs with a seven-year surrender period. This is compared with 16.2 percent in the first quarter of last year, according to Moore.